Optimal pricing and commitment in two-sided markets ∗

Abstract

This paper proposes a model of Bertrand competition between platforms and analyzes the sustainability of dominant platform equilibria in two-sided markets with the following characteris-tics: i) platforms are essential bottlenecks for buyers (users) to access the products offered by sellers (developers); ii) sellers en-ter the market before buyers; iii) only sellers can multihome; iv) platforms can charge fixed fees on both sides and variable fees (royalties) to sellers. The central issue arising in such a context is the ability of platforms to credibly commit to the price they will charge buyers when they set their prices for sellers. The pos-sibility of commitment changes the pricing game substantially by enlarging the set of pricing strategies available to platforms and we investigate its effect on the sustainability of dominant plat-form equilibria and resulting profits, both when sellers are bound to exclusivity and when they are allowed to multihome. ∗I am greatly indebted to my advisor Patrick Bolton for uninterrupted encour-agement and advice and to David Evans who awakened my interest in two-sided markets. I also thank Glenn Ellison for concise and helpful remarks on the first ver-sion of this paper and Jean-Charles Rochet and Jean Tirole for inspiring discussions and guidance in its early stages. All errors are mine.